On 9 May 2016, the China State Administration of Taxation ("SAT") and the China Ministry of Finance ("MOF") announced the commencement of a comprehensive reform of China's Resource Tax system (the "Resource Tax Reform"). The following three new tax circulars have been released by the SAT and the MOF, setting out the purpose, principles, contents and guidelines for the Resource Tax Reform (together as the "Circulars"):
- The Notice on the Promotion of Resource Tax Reform (Caishui  No. 53);
- The Notice on the Policies for Resource Tax reform (Caishui  No. 54); and
- The Provisional Measures for the Trial Reform of Water Resource Tax (Caishui  No. 55).
According to these Circulars, the first stage of this Resource Tax Reform is focusing on converting the tax basis of China's Resource Tax from quantity to price, and the implementation of a water resource tax pilot program in the Hebei Province. Local tax authorities at the province level have been required to formulate their corresponding local tax rules and start implementation from 1 July 2016.
The Current Resource Tax Regulation
The current PRC Resource Tax Provisional Regulation and its implementation rules (together as the Regulation) are over 20 years old, formulated in 1993 and slightly amended in 2011. The Regulation lists Crude Oil, Natural Gas, Coal, Non-metallic Ore, Ferrous Metal Ore, Non-ferrous Metal Ore, and Salt as the seven categories of taxable natural resources. Enterprises that extract the taxable natural resources within the territory of China are liable to pay Resource Tax, and the Resource Tax payable for most taxable items1 is calculated based on the quantity of the natural resource sold / used, and the tax rates. The tax rate ranges from a few RMB per ton to 60 RMB per ton, depending on the scarcity, grade and location of the taxable natural resource. Tax authorities at the provincial level are generally not allowed to decide or adjust the tax rate for a natural resource, unless the central government has not specifically indicates the applicable tax rate for such a natural resource.
As early as in 2009, the China government realized that this Resource Tax system was falling behind of China's economic development. In many formal occasions, the China government agreed that the Regulation has the following critical issues:
- The quantity-based tax calculation method is very rigid and cannot respond to the fluctuation of resource market price;
- The range of taxable natural resources is considerably narrow, and does not include other important subjects such as water, forest and pasture;
- The Resource Tax overlaps with many local surcharges that are also calculated and imposed on quantity basis, which significantly add on the taxpayer's burden especially when the market goes down; and
- Provincial governments do not have enough authority to change or adjust the tax rates based on local market and industry status.
The Resource Tax Reform
Due to various political and economic reasons, the Resource Tax Reform finally started after six years. As defined by the SAT and the MOF, the purposes of the reform is to increase the elasticity of the Resource Tax system, eliminate duplicated local surcharges, enhance the authority of provincial government, and gradually cover more natural resources as taxable items.
For these purposes, the Circulars set out the following new policies for implementation in the first stage of the reform.
- Change the tax basis from quantity to price. Except for certain low value items such as clay, sandstones, non-metallic ores, all the natural resources will be taxed based on their sales price and the applicable tax rates.
- Grant provincial governments the power to determine the applicable local tax rates within the range indicated by the SAT and the MOF, subject to the final approval of the SAT and the MOF. In particular, the Circulars provides an indicative tax rate range for certain key types of natural resources (eg, 1 percent to 6 percent for iron ore concentrate, and 3 percent to 9 percent for aluminum raw ore). Provincial governments may use any rate within such ranges for the resources extracted at their localities and adjust some tax rates based on local market and finance situations.
- Eliminate the Mineral Resource Compensation Surcharge ("MRCS") and the Price Regulation Fund Surcharge ("PRFS"). MRCS and PRFS are the two main local surcharges attached to the current Resource Tax system. They will be formally cleared out of the Resource Tax system, together with some other local surcharges identified as inconsistent with the China tax law and regulations.
- Trial Water Resource Tax Pilot Program in the Hebei Province. As a pilot program, the Hebei Province will start to levy resource tax on the consumption / use of both surface water and groundwater, and the resource tax will be calculated based on water quantity and corresponding tax rates. Different tax rates will be applied based on local water resource status and the nature / purpose of the water consumption. Punitive tax rates may also be imposed if a taxpayer exceeds the prescribed water consumption quotas.
In view of encouraging resource saving and environment protection, the Circulars also provide some preferential treatments. For example, resources extracted by way of filling mining may enjoy a 50 percent reduction on the resource tax payable, and resources extracted from a depleting mine may enjoy a 30 percent reduction. At the same time, provincial governments are also allowed to formulate other preferential tax treatment for extraction / utilisation of low grade ore and wastes.
The implementation of this Resource Tax Reform is a very complicated and challenging task for China local government authorities. Along with the slowing down of China's economy, China's demand for natural resources is expected to stay on the downslope in the next few years, which provides a window for testing and adjusting Resource Tax policies. However, China will still remain a major natural resource consumption country, and the growing pressure of natural resource reservation and environment protection have to be considered in implementing the new Resource Tax policies and choosing the local tax rates.
As indicated in the Circulars, the Resource Tax Reform should not increase the tax burden of taxpayers "from an overall perspective". Given this guiding principle, provincial governments most likely will orient the new tax rate based on the current tax level first, instead of trying to make drastic changes right away. A possible strategy that may be taken by provincial governments is to slightly increase the Resource Tax on the natural resources for conventional energies, such as coal and iron, and to slightly reduce the Resource Tax on natural resources related to clean energies, such as natural gas. In the long run, the differentiated tax rates in different provinces may create some new opportunities for investors, and the provincial governments may also use their power to further lower local tax rates to attract investment in natural resources related to new energies.
As many domestic small-scale enterprises may not have the necessary technologies and capability to do filling mining and satisfy other conditions for tax reduction, they are likely to fade out of the market more quickly. In this regard, there will be more opportunities for investors to take in valuable assets in the market, and a further increase of merger and acquisition cases in the mining industry is likely to be observed in the next few years.
For taxpayers, the Resource Tax Reform's actual impacts could be fairly different depending on their location, target natural resources and the local tax rates. Taxpayers are suggested to keep good communication with the local authorities to cope with the incoming changes arising from the new local policies.
Note 1: Starting from 2010, Resource Tax on crude oil and natural gas has been calculated based on price, instead of quantity.